How Does Replacement Cost Work in Home Insurance?

Purchasing homeowners insurance here in the Triad Region is much the same as buying it anywhere else except, of course, folks around here are extra nice! Like homeowners coverage everywhere, you buy it hoping you'll never need to use it, but if you ever have cause to file a claim you'll be glad you were wise enough to get good protection when you did.

Buying a homeowners insurance policy involves a substantial number of choices that have to be made. Besides deciding on which underwriter to utilize, you'll also have to select which of the insurance companies he/she represents you prefer, exactly what kind of coverage you require, how much of a deductible you're comfortable assuming, which of your possessions may require special, high value protection and more.

Another choice you'll be facing when taking out homeowners insurance is whether you want replacement cost coverage or actual cash value coverage. This decision will be a determining factor in the payout amount in the event you ever file a claim for a covered loss. It will also be a major factor in figuring your premium costs. Replacement cost coverage is more expensive to buy than actual cash value insurance but the amount paid on a claim will almost always be greater also. Here's how it works.

Benefits of Replacement Cost Coverage

Homeowners insurance covers you for losses in two distinct areas – dwelling and possessions. If you suffer a covered loss with a possession - if for example your TV and stereo system gets stolen - your insurer will settle the claim one of two ways:

1. With actual cash value (ACV) coverage, you'll be paid an amount equal to the cost of replacing your electronic equipment at its current value. This means buying like-branded and quality equipment, factoring in depreciation based on age and condition.
2. With replacement value coverage, you're reimbursed the amount required to purchase the same or similar equipment at today's prices with no depreciation included.

The same system applies when filing a claim for a loss involving some or all of your dwelling. If you were to lose your entire house to fire, a replacement value policy would pay the cost of replacing your home at today's prices, regardless of how much home values or the cost of building materials have increased. An actual cash value payoff would be based on the home's value with no regards to cost to repair or rebuild.